Return FraudOur Top 10 Tips to Keep Return Fraud From Impacting Your Revenue

March 28, 2023 | 15 min read

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Return Fraud

In a Nutshell

Did you know that about 10% of the merchandise returned to you last year were probably examples of refund fraud? What can you do to staunch the bleeding? This article will explain everything you need to know about return fraud, including what it is and how you are being targeted, plus offer Ten tips to keep it from happening again.

Return Fraud: What is it? How Merchants Can Fight Back & Recover Their Revenue?

Did you know that, according to the National Retail Federation, nearly one in five purchases will ultimately result in a return?

Accepting product returns is just a natural part of operating in the retail environment. However, the same NRF data also reveals that a significant number of returns were cases of return fraud.

Return fraud occurs when customers steal from a retailer by returning items that do not qualify for a refund. This can be the result of an honest mistake on the part of the consumer. That said, an increasing number of cases involve premeditation and malicious intent, as we’ll explore below.

What is Return Fraud?

Return Fraud

[noun]/rə • tərn • frôd/

Return fraud refers to the act of returning merchandise to a retailer for a refund in violation of the merchant’s stated return policy. The merchandise may be ineligible for a refund because it was purchased from another retailer, because the item is used, or was marked as otherwise ineligible for a refund before purchase.

Return fraud happens when consumers bring an item (or items) back to you to request a refund in the form of store credit or cash. However, the return request is invalid, as the customer does not have a legitimate right to a refund for one reason or another.

There are several reasons why many merchants turn a blind eye to suspected return fraud. For instance, there’s the fact that a claim can often be your word against the cardholder's. Customers can use a lot of different excuses to claim a return. You have no definitive way of verifying their claim, though.

Even if you suspect fraud, you don’t want to risk alienating customers by making unprovable accusations. Angering customers can lead to reputational damage. Even worse, a buyer may file a chargeback to get their refund from the bank, rather than through the proper channels.

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Common Return Fraud Tactics

As we mentioned earlier, it’s possible to commit return fraud innocently. A customer may not have read your return policy, or they may return the item to the wrong store by accident.

To illustrate, think about retailers that carry similar products; take home improvement suppliers like Lowes, Home Depot, and Ace Hardware, for example. These stores stock many of the same items. Without a receipt, it may be hard to prove someone didn’t purchase the item from one or another of those retailers.

That’s just one example. There are a number of tricks which buyers can use to intentionally commit theft through your returns process. A few of the more common tactics include:

Receipt Fraud

Fraudsters can find sites that sell fake digital or physical receipts. The thief uses these resources to commit fraud without making a purchase from the targeted retailer.

Returning Shoplifted Goods

Bad actors shoplift merchandise, then “return” the item without a receipt for a refund or store credit.

Receipt Switching

The fraudster makes a purchase, leaves the store, then reenters later, and picks up an identical item. The thief uses the original receipt to secure a refund on the second item, effectively getting the first item for free.


Shoppers buy merchandise but plan on returning the items after initial use. For example, an expensive outfit that is worn once then returned, or a book that is returned after reading.


Fraudsters secure valid receipts that have been discarded or stolen. Using the receipt as a type of “shopping list,” they select items on the receipt and return them for a refund.

Price Switching

Buying an item at one price, then switching the tag with that of a higher-priced item before returning the item for a refund.

Merchandise Exchange (Arbitrage)

Shoppers purchase a new item, then return an older or non-working version of the same item, using the packaging from the newer merchandise. Another version of this scheme involves swapping similar-looking items with different features and prices, then returning the lower-cost one and passing it off as the expensive item.

Return fraud scams are not solely practiced by individuals. Large, multinational crime rings may be behind and attack, for example.

The same applies to your competition, who might use return fraud as a sabotage tactic. One may purchase a large amount of a product in your inventory, then wait for you to restock. The competitor then sends everything back and demands a refund, meaning you’re now stuck with much more inventory than you anticipated.

Many of these tricks are harder to pull off in a physical store thanks to the use of barcodes on products and receipts. That’s why return fraud is even more of a threat for eCommerce merchants.

The Cost of Return Fraud

Of course, returns are an important part of the retail space. Knowing a product can be returned increases customer confidence, allowing them to feel more secure in buying from you. 

According to the National Retail Federation, consumers returned more than $816 billion worth of merchandise purchased in 2022. For every $1 million in sales, the average retailer also incurred $165,000 in merchandise returns. And, more than one in ten refund requests are cases of return fraud.

Another thing to consider is that a large number of returns tend to occur over the holiday season when retailers are likely to be understaffed and overwhelmed. By extension, this means the rate of return fraud will also climb ahead during the holidays.

Appriss Retail reports that retailers accepted around $603 billion in merchandise returns — three-quarters of the entire annual total — during the 2022 holiday season. Approximately $62.1 billion of these returns turned out to be fraudulent. 

So, what can you do to insulate your business from these startling return statistics? Does technology offer any relief? Thankfully, the answer is yes. 

Does Conventional Fraud Detection Software Help Prevent Return Fraud?

The short answer: kinda.

Fraud detection technologies and tactics get better every year thanks to ongoing innovations in fraud-response research. Many of these tools have become very nuanced. They can enable access to a broad range of applications, even for those with limited tech know-how.

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These anti-fraud tools can help you swiftly identify and rate incoming transactions for fraud. They may also help you predict which transactions might lead to post-transaction, first-party threats like return fraud as well. For instance:

Data Breach Scanning

Some systems can detect and reveal email addresses that have been compromised in a recent data breach. While this doesn’t necessarily mean that the customer isn’t who they say they are or is even aware that their data has been exposed, it could possibly indicate that secondary authorization procedures should apply.

Phone Number Lookup

Customer phone numbers can tell you a lot about a transaction. For instance, you can glean what country and region the customer hails from, what carrier they use, and whether or not they have used that number to make other purchases with you. This information might seem innocuous, but it could prove useful if you suspect that the customer is a fraudster.

Social Media Lookup

You can use social data to ascertain whether or not the customer is who they say they are. It is highly unlikely that fraudsters will set up social media accounts for fake personas. Thus, if the customer can be linked to accounts set up with the provided name, email, and phone number, there’s a good chance that the customer themself initiated the purchase.

Reverse Email Lookup

Reverse email lookups can tell you how long the customer has had the email address used and sometimes even how many email addresses are associated with the name they provide. Many return scammers will set up multiple email accounts under free domain services to keep merchants from digging up their factual information. Performing a quick email lookup can tell you when the address was created to gauge that customer’s legitimacy.

Data enrichment like this can’t solve return fraud altogether. But, it can help you identify and isolate behaviors associated with bad customer behaviors.

You can integrate data enrichment analysis with your CRM for use in real-time. You can even download lookup extensions through Chrome. Either way, the point is to analyze suspicious transactions on a person-to-person basis in order to detect potential consumer fraud patterns. 

Top 10 Tips to Avoid Return Fraud

The steps outlined above can help you… at least to some extent. At the end of the day, though, there’s no foolproof way to “prevent” first-party fraud scams like return fraud in the same way you can screen for and block third-party fraud.

Still, many instances of return fraud can be countered by implementing best practices. This calls for a delicate balance between preventing fraud and serving customers.

With all that in mind, here are 10 simple steps you should take to avoid return fraud and minimize your risk:

1 | Fine-Tune Your Return Policy

Develop and implement a clear, reasonable set of parameters for returns. Your policy should be practical yet adaptable. Things to consider include:

  • Expectations: Clearly define the condition in which merchandise should be returned. For instance, specify that goods should be unopened, with tags attached and invoice included.
  • Time Limits: Set time limits for the return of merchandise. The time frame is usually up to 90 days for online purchases, but can vary widely depending on the product category.
  • Return Shipping: For card-not-present purchases, you should specify how return shipping should be done. Include such things as acceptable carriers, packaging, and insurance requirements.
  • Fees: Are there additional charges associated with the return, such as a restocking fee? Who will pay for return shipping, if necessary? Will you supply a return label on request?
  • Exceptions: If certain merchandise (such as a customized item) is subject to alternate policies, be sure to thoroughly explain this difference and get confirmation from the customer prior to the sale.
  • Special Circumstances: Your standard return policy may vary depending on the product category, location, currency, or other conditions. For example, international customers may require more time for returns.

2 | Make Your Policy Accessible

More than two-thirds of online shoppers will insist on reading your return policy before deciding to buy. If customers can’t find or understand that policy, however, it might as well not exist.

Once you develop a transparent return policy, you must make sure those rules are easily accessible. This means prominently displaying the policy in as many places as possible. Your terms should be easy to find on every page of your website (including during checkout), on invoices and other customer records, receipts, and even on packaging.

3 | Historic Data is Key

In order to spot suspicious consumers, you must have the means to swiftly and accurately access historical data in order to recognize incoming threats and resolve previous hangups. So, keeping excellent records is not optional if you want to prevent return fraud or any other form of first-party fraud.

Historical data analysis can help you spot return fraudsters before they strike. For instance, you can compare cardholder information on file against the information provided, previous return requests, date and location, etc.

This data can be quite handy in helping you identify frequent return scammers, and also pinpoint which items or products that are most often targeted.

4 | Be Flexible

Your return policy should be firm, yet flexible.

For instance, what happens when a customer narrowly misses the cutoff date for a return or explains that they ordered the wrong item as a gift? Being flexible here is a great way to build brand equity and long-term customer loyalty.

Keep in mind one of the top reasons customers commit friendly fraud is convenience. Making your return policy as customer-friendly as possible takes away a primary incentive for cardholders to contact the bank.

5 | Cut Down on Cash Refunds

Cash is still king, and can be an attractive incentive for fraudsters. If you remove the opportunity from the equation, many scammers will be deterred from trying their luck at your in-store locations.

For those customers who paid in cash, you can politely substitute cash refunds for store credit and/or exchanges, ensuring genuine customers can return things they don’t want while discouraging scammers from committing return fraud.

6 | Transform Returns into Opportunities

If leveraged properly, each return is an opportunity to create new sales and build customer relationships. Consider offering customers the option to receive a bonus if they exchange an item for store credit. For example, giving customers an extra 10% in credit over the value of the item.

This is a win-win for you and your customer. The buyer may never use the credit; in fact, over one-third of store credits are never used, with the average value of unused store credit (including gift cards) sitting at $167 per person. Even if the credit is used, the customer will often make additional purchases at the same time. They’re happy, and you’re happy.

7 | Ask for a Receipt… and ID!

More than four in five cases of return fraud occurred without a receipt. Only 3.6% of returns were identified as receipted return fraud. In contrast, 16.6% of all returns were non-receipted return fraud.

To take this idea one step further, you can discourage a lot of questionable returns simply by requiring identification to process returns. If a customer is who they claim to be, then providing ID to verify returns shouldn’t be a big issue.

Examples include photo identification and the payment card used to make the purchase for in-house returns. For online returns, address and zip code information, plus the last 4 digits of the payment card used, should suffice.

8 | Enforce Your Return Policy

The entire reason to have a return policy is to deter fraud. If you’re not actively enforcing the terms laid out in your policy, can you really be surprised when they fail? A good rule of thumb here is to ensure that your employees are fully familiar with and trained to enforce your return policy when applicable.

Additionally, letting customers know the terms laid out in your policy are non-negotiable ahead of time is a wise move. You can do this at checkout by explaining the return policy highlights at the register or by requiring acknowledgment of the policy before online checkout.

Like we mentioned above, there’s a time for flexibility in refunds. However, having solid policies to fall back on is still crucial.

9 | Deploy Fraud Detection Software

Return fraud is a post-transactional threat, which makes it very difficult to spot and resolve. However, you can drastically reduce your overall exposure by deploying effective solutions pre-checkout. This would improve not only your bottom line but also your reputation with banks and credit card networks.

Fraud-fighting tools like address verification, CVV validation, 3-D Secure, and fraud scoring are among the most effective options. While none are a foolproof solution against fraud on their own, these solutions are highly effective at limiting overall risk when used in tandem.

10 | Consult the Experts

Still concerned about your ability to fight back and avoid return fraud? It may be time to call in outside assistance.

At Chargebacks911®, we create custom chargeback management strategies for merchants tailored to your company’s unique needs. Contact us today to learn how we can help you fight back against return fraud, friendly fraud, and many other threats.


What is an example of return fraud?

Return fraud happens when consumers bring an item (or items) back to you to request a refund in the form of store credit or cash. However, the return request is invalid; for one reason or another, the customer does not have a legitimate right to a refund.

How serious is return fraud?

It’s a very serious problem. For every $1 billion in sales, the average retailer also incurred $165 million in merchandise returns. What this means is that for every $100 in returned merchandise, the average merchant loses $10.40 to return fraud.

Is it illegal to get a false refund?

Technically yes. It’s technically a form of larceny, and consumers who are caught committing return fraud may be subject to heavy fines and penalties. They may even be subject to jail time, depending on the severity of the crime.

What happens if you get caught committing refund fraud?

Refund fraud is technically a form of larceny. Consumers who are caught committing return fraud may be subject to heavy fines and penalties. They may even be subject to jail time, depending on the severity of the crime.

What is the most common return fraud?

The most common refund scheme reported by retailers is “wardrobing.” This refers to the practice of purchasing an item, with the intention of using it once or twice, then returning it for a full refund later.

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